India: Supreme Court Ends Jurisdictional Impasse Between CERC & SEBI Over Forward Contracts In Electricity

The Supreme Court of India ('SC') had passed an order dated October 6, 2021 ('SC Order'), thereby, ending 10 year's jurisdictional quandary between power regulator Central Electricity Regulatory Commission ('CERC'), and market regulator Security Exchange Board of India ('SEBI') over forward contracts. Simply put, forward contracts are derivative contract between two parties to buy or sell a commodity at a specified price on a future date.

The end of this legal discord between CERC and SEBI has the potential to expand the horizons of power sector, as it allows electricity to be traded as a commodity with forward contract and derivatives on exchanges. This may be very significant development for fast expanding EV market and charging infrastructure.

Background

The disagreement between two regulators began when CERC had passed orders dated April 28, 2009, and January 11, 2010 ('CERC Orders') against Multi Commodity Exchange of India Limited ('MCX'), and Forward Market Commission, Ministry of Finance, Government of India ('FMC'), purporting CERC's exclusive jurisdiction over forward contracts and futures in electricity.

Aggrieved by the CERC Orders, MCX and FMC, which are commodity derivative exchange bodies, filed a writ petition against CERC challenging the CERC Orders before the Bombay High Court ('High court'). The High Court after hearing all contentions observed that there exists a point of conflict between two statutes of central government viz. Forward Contract (Regulation) Act, 1952 ('FCRA'), and Electricity Act, 2003 ('EA'), wherein, FCRA, and EA have authorized two separate regulatory bodies i.e., CERC, and FMC, to have jurisdiction over forward contracts in electricity.

Pursuant to hearing arguments from parties, the High Court vide its order dated February 7, 2011 ('High Court Order'), adjudicated that neither FMC under FCRA, nor CERC as per EA shall have exclusive jurisdiction to control and regulate forward contracts in electricity, unless suitable amendments are made in concerned regulations.

The High Court Order was challenged before the SC by the CERC, SEBI and Power Exchange of India Limited ('PXIL'). During the pendency of the matter, Ministry of Power formulated a committee for efficient regulation of electricity derivatives, and subsequently, the committee's recommendations were agreed upon by SEBI and CERC, and were issued as office memorandum dated July 10, 2020, by Ministry of Power ('MoP Memo'). After hearing arguments from all the concerned stake holders, and after due considerations to the content of MoP Memo, the SC vide SC Order disposed of the pending appeals with the consent of CERC and SEBI, and the SC directed parties to abide by the term and conditions recommended in MoP Memo.

Important extracts from MoP Memo:

• All, ready physical delivery contract, and specific delivery contracts in electricity, entered by members of the power exchanges, registered by CERC, wherein the rights and liabilities are not transferable ('Non-transferable Specific Delivery Contract') shall be regulated by CERC.
• A joint working group between CERC and SEBI shall be constituted.
• All commodity derivatives in electricity other than Non-transferable Specific Delivery Contract shall fall under the purview of SEBI.

Impact on power market:

• The MoP Memo and SC Order paved way for commodity exchanges to trade in financial products like electricity futures, etc., thereby enabling distribution companies and large consumers to hedge the risk involved in power procurement.
• As per scenario before the SC Order, the trading of electricity via term-ahead market was limited to 11 days; however, the said SC Order will supposedly pave way for longer duration based forward contracts in electricity without such aforementioned time restraint.
• Large electricity consumers, Electric Vehicle stakeholder ('EV Stakeholders'), and market consumers can make use of longer delivery based physical contracts for better and efficient management of their portfolio requirements.
• Concept like market coupling mechanism will be made applicable for real time power trading, wherein the spot prices within a common geographical location, and time slot, across power exchanges would be aligned.
• Post clarity provided vide SC Order, new platforms for commodities market will now start entering the market, which is evident from the fact that market players like Pranurja Solutions Limited, promoted by Bombay Stock Exchange, PTC India Limited and ICICI Bank Limited, have already started procuring requisite approval and licences for setting up a new power exchange.

Conclusion:

The SC Order, and MoP Memo, resolved the decade long pending dispute between power regulator CERC, and market regulator SEBI. The SC Order along with MoP Memo has laid the foundation for trading electricity as a commodity on CERC recognized platforms, and SEBI recognized platforms, thereby, giving additional options to consumers for satisfying their short term and/or future requirement of power.

By allowing the electricity consumers to pre-fix the expenditures and revenue model beforehand, the said SC Order is also supposed to help the EV Stakeholders in better and efficient portfolio management, and it will also help the EV Stakeholder in the process of bulk power dealing, required for running the EV infrastructure.

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